The New Math in Custom Manufacturing

Customers looking to outsource product manufacturing have many reasons for doing so, such as gaining access to a skilled workforce, incorporating new viewpoints, establishing geographic diversity and establishing a local source of supply. Cost reduction, however, tends to be a chief motivator. Therefore, all factors that can affect the cost of outsourcing–both direct and indirect–must be considered when making the decision to outsource and in selecting the most appropriate service providers.

Labor, energy, raw material, transportation, taxes and tariffs-all are direct contributors to the total cost of an outsourced project. Currency fluctuations, consistent quality, on-time delivery, logistics capabilities, communication issues, cultural differences, respect for intellectual property, lack of international inspections–all are indirect costs, and can have a serious impact on the outsourcing equation as well.

Over the past couple of years, Western pharma and other fine chemical producers have come to realize just how important both types of factors can be. Rising labor, raw material, energy and transportation costs, combined with the elimination of export subsidies and rising investments in environmental and safety programs, have markedly reduced the cost advantage that many Chinese suppliers have enjoyed in the past. Closure of chemical manufacturing sites during the Olympic Games raised awareness of serious logistics concerns. The recent series of product contaminations resulting in several tragic deaths have underscored the immeasurable cost of poor quality practices.

With this growing awareness of the true risks involved in outsourcing to China occurring at a time of decreasing cost savings, the equation has changed. Customers have responded by electing to outsource to Western custom manufacturers some projects they previously would have taken to China. Many Socma members are currently benefiting from this trend.

All agree that Chinese suppliers will continue to remain serious competitors in the custom manufacturing market, especially for basic raw materials. But with so many unknown and potentially unattractive variables involved, the outsourcing equation is necessarily mutable and appears to be changing, with risks more balanced against cost savings. Well established, Western manufacturers can be expected to help customers solve this troubling equation.